China Communications Services Corporation Limited

Hot Topics

Q1. What were the major growth drivers for the Company's relatively rapid growth in the
        domestic telecommunications operator market in 2012? Will 4G development in China
        drive the Company's growth in 2013 and in the future years?
In 2012, driven by factors such as the development of mobile Internet industry and the "Broadband China" strategy, the domestic telecommunications operators have steadily increased their spending in capital expenditure as well as their network operation and maintenance. Under such circumstances, the Group devoted more efforts in market development and service enhancement to efficiently support the full-service operations of domestic telecommunications operators, which led to a rapid business growth from the domestic telecommunications operator market, with revenue increased by 16.2% compared to that of 2011, representing 64.6% of total revenues. In addition, the Group proactively involved in the trial construction projects of LTE and well prepared for seizing market opportunities.

Based on the judgment of the development trend of the communications industry and experiences in serving customers over the past years, the Group believes that the capital expenditure by the domestic telecommunications operators will keep increasing stably in the coming years given the continuing growth of their customer base and network scale, as well as the continued introduction of new technologies and businesses related to LTE and cloud computing data center. More investment will be put into the optimization and maintenance of the network by telecommunications operators. All of the above will bolster the continued steady business development of the Group in the domestic telecommunications operator market.

In the future, the 4G licensing will bring development opportunities in various areas including network construction, maintenance and applications. Having an integrated business model, China Comservice will be one of the major beneficiaries to be benefited at the earliest stage of this industry development. Although details in respect of 4G licensing has yet to be announced, we will proactively follow the investment opportunities arising from 4G licensing, and strengthen our leading position in domestic telecommunications operator market through participating in LTE construction projects actively, continuously promoting our service standard, and developing high-end maintenance and operation businesses.
Q2. What was the major reason for the decline in the Company's revenue from overseas
        market? What is the outlook for the overseas market in 2013?
In 2012, the revenue from overseas market declined by 7.0%, and its proportion to total revenues was 5.5%. Although the revenue from overseas market decreased temporarily due to the Group's proactive risk management and the delay of certain overseas largest scaled turnkey project, the Group adhered to its "Overseas Market – Focused and Four Steps" strategy and further strengthened its foundation of overseas turnkey projects. In addition, the Group adopted a synergistic approach in developing outsourcing projects and fine-tuned the collaboration mechanism with equipment manufacturers. All the above measures will bolster the healthy development of the Group's overseas market in the future.

During the year, the Group focused on its expansion in turnkey projects and made groundbreaking steps in winning new projects for customers including telecommunications operators, government agencies and large enterprises, such as construction of overseas POP project for domestic telecommunications operator, Phase II SCPT national backbone fiber optic network project in Congo-Kinshasa, Mobily FTTH project in Saudi Arabia. Meanwhile, the Group deepened the execution of the strategic cooperation agreements with telecommunications equipment manufacturers, actively promoted synergistic subcontracting, and firmly adhered to efficient development.

In the future, the Group will further enhance its marketing capability and risk management in overseas market, endeavoring to achieve scale breakthrough in overseas market in a prudent manner.
Q3. What were the major drivers for the stable business growth in the domestic non-operator
        market in 2012? Did the Company take part in "Smart City" related projects?
In 2012, the revenue from domestic non-operator market increased by 15.5%, representing 29.9% of total revenues, showing a favorable growth momentum. The Group has endeavored to expand the domestic non-operator market. In addition to replicating its experiences and technologies in serving domestic telecommunications operators, the Group proactively provides services, such as city pipelines engineering, intelligence building and cloud computing data center construction, to key customers such as government agencies and customers in the industries of construction and property, transportation, etc. In 2012, the Group captured the opportunities of industrialization, informatization and urbanization in China, improved its product offering and thus achieved breakthroughs in the expansion of many industrial customers. Subsequent to certain completed projects such as "Safe City" in Chongqing and Xi'an Horticultural Expo, the Group won several sizable projects during the year, including Integrated Management, Operation and Service Platform Development Project for "Smart Nanjing", Integrated Public Safety Management System Platform Construction Project in Fujian province, pipelines engineering related projects of Shenzhen Metro, etc. All of the above have significantly enhanced the Group's brand awareness and market influence and led to steady revenue growth from its domestic non-operator customers.

In 2013, we will seek scale development of domestic non-operator market by capturing the market opportunities driven by urbanization and informatization, as well as focusing on key customers such as government, industrial customers and small and medium-sized enterprises, with a specific focus on the development of "Smart City" projects, particularly "intelligent building" projects, by providing top level design consulting and key application services.
Q4. Why did the account receivables turnover days increase in 2012? How does the Company
        enhance its cash management?
In 2012, the account receivables turnover days increased from 103 days in 2011 to 115 days (The account payable turnover days were 140 days in 2012). The increase of account receivables was mainly attributed to the domestic telecommunications operators, which posed relatively low risk to the Company. The major reasons were due to certain customers’ internal enforcement on centralized financial management and tightened internal control that had led to payment delay, as well as relatively sluggish payment cycle among certain domestic non-operator customers. In addition, there was an increasing demand for working capital during the year due to the increased efforts in market development of the Group. Therefore, free cash flow decreased as compared with last year to RMB166 million.

The Group will, on the one hand, strengthen cash flow management, which includes enhancing analysis on ageing and customer mix of account receivables, increasing frequency of assessment on account receivables, pushing on more stringent collection on account receivables and leveraging financial instrument proactively by adopting account receivable financing for certain overseas projects. On the other hand, the Group will continue to enhance the operation of funding pool, and increase funding utilization efficiency by the two tier funding pool in head quarter and provincial subsidiaries.
Q5. How could the Company sustain relatively stable margins in 2012? Why did the
        subcontracting cost increase rapidly in 2012?
Although the Company was facing pressures from market competition and cost inflation in 2012, the Group alleviated such pressures effectively through measures such as costs control and synergistic operations, and maintained a relatively stable gross profit margin and net profit margin of 15.9% and 3.9%, respectively. In 2012, the subcontracting cost increased by 27.0% year on year. The increase was mainly due to the rapid increase in business volume of the Group in 2012, and the Group continued to focus on high-value businesses and outsource certain low-end tasks having considered its strategic development, effectiveness and efficiency, resulting in a rapid growth in subcontracting charges.
Q6. What is the dividend policy of China Comservice?
We have high regards to the views and wishes of investors and always make great efforts in enhancing our shareholders' return steadily. Since the Company's listing, it has been increasing its dividend and sustained its dividend payout ratio of 40%. In future, we will determine our dividend policy by taking into consideration of the factors such as business development needs, CAPEX requirement, cash flow status and M&A opportunities. The Company will continue to make decisions that benefit the overall development of the Company and are aimed to maximize the shareholders' return. (Please refer to "Dividend History" for more details)

Basic Information

Q1. What kind of company is China Comservice?
China Comservice (China Communications Services Corporation Limited) is a leading service provider in the PRC that provides integrated support services in the informatization sector including telecommunications, media and technology. It is also the largest telecommunications infrastructure service provider in the PRC. Our services include telecommunications infrastructure services (TIS) covering design, construction and project supervision; business outsourcing services (BPO) covering maintenance, distribution of telecommunications services and products, and facilities management; applications, content and other services (ACO) covering IT applications, Internet services, voice VAS and other services. (Please refer to "Corporate Profile" and "History" for more details)
Q2. When was China Comservice listed?
The Company was listed on the Stock Exchange of Hong Kong on December 8, 2006. The offering price was HK$2.20 per share. (Please refer to "Corporate & Shares Information" for more details)
Q3. Who are the major customers of China Comservice?
All major telecommunications operators in China, namely, China Telecommunications Corporation ("China Telecom"), China Mobile Communications Corporation ("China Mobile") and China United Network Communications Group Company Limited ("China Unicom") are our customers. We also provide services to domestic non-operator customers and overseas customers. In 2012, the Group attained a relatively stable customer mix. Revenue from domestic telecommunications operator customers accounted for 64.6% of total revenues. Revenue from domestic non-operator customers accounted for 29.9% of total revenues and revenue from overseas customers accounted for 5.5% of total revenues.

While further developing domestic telecommunications operator market, the Group has also endeavored to expand the domestic non-operator market. The Group proactively provides services, such as city pipelines engineering, intelligence building and cloud computing data center construction, to key customers such as government agencies and customers in the industries of construction and property, transportation, etc.

Other than China, the Group's business also covers over 50 countries and regions in the world, and its overseas expansion is mainly focused on markets such as Africa, Middle East, Asia Pacific and Latin America. We provide integrated solutions for ancillary communications networks and integrated informatization solutions for the overseas telecommunications operators and other customers through engaging in turnkey projects and subcontracting projects.
Q4. Who are the major shareholders of China Comservice?
China Telecommunications Corporation is our controlling shareholder which holds 3,559 million domestic shares, representing 51.4% of our total issued shares. In addition, China Mobile Communications Corporation, China United Network Communications Group Company Limited and China National Postal and Telecommunications Appliances Corporation hold 608 million, 236 million and 131 million domestic shares, representing 8.8%, 3.4% and 1.9% of total issued shares respectively. The public holding is 2,391 million H share, representing 34.5% of our total issued shares. (Please refer to "Shareholding Structure" for more details)
Q5. What are the telecommunications infrastructure services provided by China Comservice?
The Group is the largest telecommunications infrastructure service group in the PRC, providing a full range of telecommunications infrastructure services to telecommunications operators in China and overseas. These services include planning, design, construction and project supervision for fixed line, mobile, broadband and support systems. The Group also provides integrated solutions for ancillary communications networks and integrated informatization solutions for domestic non-operator customers such as government agencies, industrial customers and SME's, as well as overseas customers. (Please refer to "Business Review" for more details)
Q6. What is the distribution service under Business Process Outsourcing (BPO) Service?
Distribution service means distribution of telecommunications services and products. The distribution services of the Group include the wholesale and distribution of communications machineries and handsets, logistics, procurement agency services. Our major customers are telecommunications operators, telecommunications equipment manufacturers, government agencies and medium to large-sized enterprises. (Please refer to "Business Overview" for more details)

As an integrated support service provider, our provision of distribution service enables us to cover both front end and back end services all along the value chain of telecommunications operator customers. This helps us to provide integrated services serving all aspects of the value chain, strengthen our competitive advantage of comprehensive one-stop service provision and promote our service value, therefore improving our customer loyalty and benefiting our long term business development.
Q7. What is the ACO service?
ACO means Applications, Content and Other services. The Group provides system integration, software development, system operation and maintenance support, Internet services and voice value-added services to the domestic telecommunications operators, industrial customers and etc. (Please refer to "Business Overview" for more details)
Q8. Does the Company provide share options to its employees?
As a long term incentive and according to the regulations of the government, our company adopted a share appreciation rights (SAR) scheme to align the interests of target employees with the company. Under the scheme, a SAR constitutes the right to receive an amount of cash equivalent to the appreciation, if any, in the fair market value of an H share of our company and the exercise price of the SARs. No shares will be issued under the scheme; accordingly, the shareholding of the shareholders of the Company will not be diluted by any grant of SARs.

Last Updated: 14 May 2013